I have a love-hate relationship with life insurance. On the one hand, I love it. It helped me get through college and have a life. It also helps me sleep at night knowing that my family would be taken care should something terrible happen to me (God forbid).
I also hate it because many agents misrepresent it. They sell you the wrong kind of insurance and the wrong amounts. Their primary objective is often to maximize their own financial security rather than yours. Don’t let their character flaws influence your decisions about this important topic.
Do you need life insurance?
Life insurance has only one purpose: to complete your financial responsibilities if you die. That’s it. If you have no dependents you don’t currently need life insurance. Don’t fall for a common trap: life insurance is not an investment.
If you do have dependents you should buy term rather than whole life. I’m going to assume you are familiar with term and whole life insurance. It is a good idea to familiarize yourself with your options.
How much life insurance should you buy?
Remember, life insurance is meant to make up for your lost income. So we need to figure out how long your dependents will depend on your income.
One rule of thumb is to multiply your income by 17 and buy that amount of insurance. So if you bring home $48,000 a year you need $816,000 in term insurance. This is a rough estimate but let’s see if the rule of thumb works.
The battle over term versus permanent life insurance need not be a battle—there are appropriate uses for both of them. BUT, permanent life insurance is likely over-sold because of the handsome commissions received by selling agents.
The reason permanent life insurance products seem expensive is because they are. A few years ago, I purchased a new $1 million 20-year term life insurance policy with a premium of under $500 per year. I knew permanent life insurance was more expensive, but I was curious how much more expensive, so I quoted comparable whole life, universal life and variable life policies. The variable and universal policies were ten times the amount of premium and the whole life was twenty times the term premium! (Please note the difference in premiums will vary for each person, depending on age and health.)
But what is the difference between term and permanent life insurance? Regarding term life insurance, you pay an insurance company to transfer the risk that you will die during the stated term of the policy. If you have a 20-year term policy, your premiums are guaranteed to stay the same for twenty years, and if you die during the 20 year period, the insurance company pays the death benefit to your named beneficiaries. Typically, by the end of the term your need for life insurance is gone.
Permanent life insurance is substantially more expensive for two reasons: First, while term policies are primarily created to last only for a finite period of time that will likely end before you die, permanent polices are often designed to exist until you actually leave this earth. This dramatic increase in the likelihood that the insurance company will be responsible to pay a death benefit means they need to charge more in premiums. Second, permanent policies often have a tax-privileged savings component attached to the policy, so a portion of your premium is set aside to accrue for your future use.
But the “investment” feature in a permanent life policy is rarely as effective or efficient as several others, like your 401k, IRA or Roth IRA, so fill those buckets first. You should also not consider permanent life insurance until you have substantial emergency reserves, all revolving debt paid off, education fully funded and money in the bank for large future purchases. Permanent life insurance can be a valuable tool for a relative few, but unless you have income of over $250,000 annually or over $1 million in assets, your life insurance needs are likely best met with term life insurance.
According to life coach Tony Robbins, a mutual fund’s advertised average return is more misleading than it is accurate.
When debunking the nine most pervasive financial myths on Business Insider, he pointed out that when it comes to average investment returns, what you see is not what you get.
Robbins, who is the author of the new ” MONEY Master The Game: 7 Simple Steps To Financial Freedom, ” is talking about the average return you might see listed on a brokerage’s mutual fund that describes its performance over the last year, three years, or five years.
By looking at which funds have the highest percentage return (say, 8% over 3%), an investor might understandably conclude that funds with higher returns are better investments.
Not so fast, well-meaning investor. Robbins writes:
Average returns are like online dating profile photos. They paint a better portrait than the reality. When the mutual fund advertises a specific return, it’s never the return you actually earn.
He explains that there’s one reason in particular for this misrepresentation: The calculation used to get this number for the brochure, which is often what’s called a “time weighted return,” doesn’t take human activity into account. Robbins explains:
Time weighted returns assume that investors have ALL of their money in the fund the entire year and don’t take any withdrawals. But the reality is, we typically make contributions throughout the year (i.e. out of every paycheck into our 401(k)).
And if we contribute more during times of the year when the fund is performing well (a common theme we learned, as investors chase performance) and less during times when it’s not performing, we are going to have a much different return than what is advertised.
Here’s the thing to keep in mind, though: By asking whether the advertised average return is time-weighted, you can have an idea of whether it’s a return you’ll actually achieve.
A new online financial scam is hoping that your care for animals will lead you to be careless with your hard-earned savings.
According to the Federal Trade Commission, online thieves are posting advertisements for dogs and other pets who need loving homes. Many of the ads include sob stories that will make any animal-lover want to rescue a would-be furry friend. Once a customer agrees to pay for the pet, he or she will receive additional requests for common expenses such as vet bills, crating, shipping and inspection costs. There’s just one problem: The pet never comes home.
It’s a crafty scam. Typical tactics such as fake email requests for money to bogus investment opportunities have become relatively easy to spot. While it’s easy to delete a message that winds up in your spam folder, turning a blind eye to that four-legged creature in need can feel more difficult.
Still, no matter how much your heart tells you to transfer the funds from your savings or checking account to bring Patches back to your house, the FTC urges consumers to exercise caution.
If needy pets can pull on your heartstrings, here are a few tips to keep your money safe.
- Avoid money transfer requests. Money transfers cannot be refunded. If someone asks you to send money via Western Union, MoneyGram or a similar service, you’re better off keeping those funds in your bank account.
- Be your own private investigator. Ask for the seller’s name, address and phone number. Google is a powerful amateur PI tool. Search for the person’s name to see if any history of scams or complaints turn up in the results.
- Track the image. The FTC recommends right clicking on the photo of the pet and selecting “copy image location,” “copy image address” or “properties.” Copy the link into your browser. If the image shows up in an older listing, it’s most likely a scam.
- Go to the local animal shelter. According to The Humane Society of the United States, approximately 2.7 million pets in shelters go unadopted each year. If you really want to help a puppy or kitten in need, make an in-person visit to the shelter in your town